Credit Crisis: House Prices, Company Profits and US Stocks in Freefall

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As we commented last week, despite the habitual confusion and misinformation in the financial press, there are probably a few things you can count on.

First, housing prices are going down. In theory, they have to go down – because the average family can’t afford the average house. That’s not a situation that can last for long. If the average family doesn’t buy the average house, who will? No one. So, it will go down in price until the average family can buy it. Pretty simple, huh?

Of course, that doesn’t mean it will go down in nominal terms. Prices could remain the same, while inflation raises other prices and family incomes too. But in real terms, the effect is the same: the real price of housing must go down.

Second, corporate profits are going down. They are going down because they always go down after they go up. That’s the way the world works. Whenever you can make an exceptional amount of money there arise an exceptional number of people who want to take it from you. Competition narrows profit margins. Some companies are making exceptional profits because they have been able to outsource labor to Asia… but Asian labor rates are rising, too. Other companies have made an exceptional amount of money because they have gotten into the finance business – like General Motors (NYSE:GM). But, suddenly, finance ain’t the business it was a couple of years ago. One way or another, profit margins will contract.

Third, stock prices will go down. Here, too, they could go down in nominal terms… or they could be taken down by inflation. One way or another, stocks will go down. Why? Because profit margins are going down. Because risk premiums are going up. And because the tide of money that held up asset prices is ebbing away.

Fourth, the middle class in America and Britain will have to make do with less money. Standards of living will fall for average people in both countries. Their major assets – houses – are going down. They are already deeply in debt, while the price of debt is rising. The only way they can hope to make financial progress is to earn more. But, faced with two billion willing wage earners in Asia, rising wages in the two leading Anglo-Saxon countries seem unlikely. At the very least, it would require huge new investments in capital equipment and training – money that is now being squandered on consumption and war.

What about gold? The yellow metal seems ready for a correction. It has gone up so fast, it probably needs to take a breather.

But gold, too, is almost sure to rise over the long run. It is the anti-dollar… the anti-dote to financial engineering, debt, derivatives, and paper currencies generally. It is what people buy when they begin to doubt that their financial authorities know what they are doing. Our guess: gold is a cinch to rise.

But wait, dear reader. We are also facing a possible financial meltdown of monumental size. As stocks, houses, and sophisticated financial instruments lose their value… “wealth” disappears. People have fewer dollars to spend… and they grow less eager to part with them. In dollar terms, the price of gold could stabilize… or even fall. Still, given the scarcity of gold… and its record of protecting people in times of crisis, we guess that the real price of gold will go up… even in a generalized, Japan-like deflation.

But, we’re a long way from there. As far as most of the world is concerned, we’re still in a boom… prices are rising… and gold looks like a good hedge against inflation. Just a guess: Look for a correction in the short-term… and then, another run-up which will take the price over $1,000.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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2 Comments on "Credit Crisis: House Prices, Company Profits and US Stocks in Freefall"

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kayle
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Bill and Dan

What do you think are the chances of any of our governments – US, UK, Australia, or others – nationalising gold? (As if it hasn’t happened before.) Do you think it more improbable for some governments than others? How best to protect our gold investment in case of?

Would love to see an article on this sometime….

Colin
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“First, housing prices are going down. In theory, they have to go down – because the average family can’t afford the average house.”

I disagree. families can afford houses, they’re just crippled to buy other stuff. Since our culture is so focused on home ownership, people make this sacrifice.

Homes are affordable on paper, still.

wpDiscuz
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